Two separate news on the 23rd of November but interlinked at the same time is telling on the state of finances of the country. One news is that the central governmentâ€™s fiscal deficit is likely to overshoot even revised targets while the second news is the UP government waiving off farm loans as a birthday gift for a politician. The fact that a bankrupt state government can waive off farm loans of Rs 1650 crores at a time when the central government is struggling to keep down deficits shows the disconnect politicians have with the countryâ€™s finances.
The central government is expected to close fiscal 2012-13 with a fiscal deficit of 5.5% to 5.6% of GDP. The original budget estimates was a fiscal deficit of 5.1% of GDP while the revised budget estimate (October 2012) was a fiscal deficit of 5.3% of GDP. The higher deficit is due to some budget figures such as telecom spectrum auction and government disinvestment going awry and due to slow tax collection growth on a weakening economy. Corporate taxes grew by just 2% in the April-October 2012 period on the back of economic growth slowing to expected levels of 5.8% in 2012-13 from levels of 6.5% seen in 2011-12. The result of the government overshooting fiscal deficits targets is higher than budgeted market borrowing of Rs 20,000 crores (could be up to Rs 50,000 crores if deficit figures are not met) leading to rising government bond yields that in turn leads to higher interest rates for borrowers.
The UP government is running a debt of around Rs 250,000 crores and is running an annual fiscal deficit of around Rs 19,000 crores as of 2012-13. The government receives a grant of Rs 70,000 crores from the central government for implementing various projects. The state is in no position to hand out free gifts to its people and the current chief minister of UP, Akhilesh Yadav has done just that by waiving off farm loans given from a government run scheme. The funding for the state will have to come from the centre given that the state has no money to spend given its debt.
To be fair to the UP government, every other state government in India except a very few doles out gifts ranging from free television sets and laptops to farm loan and other loan waivers. Needless to say all these generous state governments have no money and depend on the centre for grants. UP is just doing what other states are doing, leading to more pressure on the centreâ€™s fiscal deficit.
The central government is engaged in trying push some key bills in the parliament and as usual the parliament has not worked for a full day yet in the current session. Fiscal deficit will take a back seat in parliament, which will approve all expenses of the government without raising a single question.
India is living in world of disconnect. The country has no solution to its debt issues except raising limits for FIIâ€™s to invest in the countryâ€™s debt. FII limits for government bond investments stand at USD 20 billion (the limit has gone up four fold over the last ten years) and the government is considering increasing the limits further. The fact that Eurozone countries such as Greece, Italy, Spain, Portugal and Ireland are in a big mess due to their sovereign debt being issued in Euros has yet to hit India. The more the countryâ€™s debt being owned by FIIâ€™s the more vulnerable the country is to the way it manages its finances.
India at this point of time is showing no maturity in managing its finances and will become more vulnerable to FIIâ€™s taking a dislike to the countryâ€™s debt.